Should you lease or buy a new car?

The first question to ask yourself when buying a new car is, "Should I lease, or should I buy?" The answer depends on many factors and is usually more complicated than simply finding the lowest monthly payment. Consider the following advantages and disadvantages of leasing before you go signing on any dotted lines.

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By Elliot Raphaelson

recordnet.com

By Elliot Raphaelson

Posted Jan. 20, 2013 at 12:01 AM

By Elliot Raphaelson
Posted Jan. 20, 2013 at 12:01 AM

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The first question to ask yourself when buying a new car is, "Should I lease, or should I buy?" The answer depends on many factors and is usually more complicated than simply finding the lowest monthly payment. Consider the following advantages and disadvantages of leasing before you go signing on any dotted lines.

Leasing does generally lead to lower monthly payments, which can be as much as 60 percent lower than auto loan payments. And you often have the option whether to make a down payment. A leased car is always under warranty and can be covered by "gap insurance" (more on that later). You may see significant savings in sales tax, and when the lease term ends, you won't have to worry about trade-in complications. In fact, you will have the option to purchase the car at a fixed price. Leasing also can be advantageous for business vehicles, because you can deduct both depreciation and financing costs. When you purchase a car, you are not allowed to deduct interest paid for financing.

Now for the downsides. When you lease a new car, you may be required to make a security deposit, depending on your credit score, and your monthly payments begin immediately. Unlike payments on a loan that lead to ownership, lease payments are not building you any equity. Lease agreements are complex contracts that require a lot of patience and attention to understand. They almost always come with annual mileage limits, and if you drive past them, it can get expensive. For example, you could end up paying 12 cents or more for every mile you drive over 10,000 in a given year. You can also be charged for excessive "wear and tear" on the car at the end of the lease term. When it comes to insurance, state law sometimes requires more coverage for leased vehicles. And there is a significant lack of flexibility should you want to end the lease early.

The most significant factor is how long you intend to drive the car. If you want a brand-new car to drive every three years, then leasing is the way to go. If you feel comfortable driving a car for six years or more, then buying is the better option.

If you've decided to go forward with a lease, then it's important to consider the residual value of a car after three years when selecting your make and model. Dealers base their lease pricing on that value. The less the car depreciates during that time frame, the less you will wind up paying for the lease. A good source for this is the Residual Percentage Guide, issued by Automotive Lease Guide, which is available at most libraries.

Additionally, most leases are "closed-end." This means that at the end of the lease you will not owe more than the anticipated residual value of the car. You should not sign a lease that is not closed-end. Otherwise, you could end up owing the lessor more.

Should you need to end your lease early, make sure you understand your options. For example, BMW does not allow you to exit your agreement in the final six months of its term. But as long as the fine print allows you to exit, there are resources like LeaseTrader.com and Swapalease.com that can help you find someone else to take over your lease.

As mentioned earlier, gap insurance is an important consideration. If your car is stolen or if you have an accident with extensive damage, your regular car insurance may not cover what you owe on the lease. You can protect yourself by purchasing gap insurance, so discuss this with your dealer to make sure you have the coverage you need.

And don't be afraid to negotiate a lease. You can negotiate the price of the car, the down payment, the interest rate, the mileage limits and the cost per mile over those limits. There are other possible fees, such as acquisition fees and disposition fees, that are also negotiable.

Some other excellent sources for more information are leaseguide.com and auto.howstuffworks.com, the latter from editors of Consumer Guide Automotive.

There are plenty of factors that go into any decision to lease or buy. Leasing can be a fine option as long as you know what you're getting into. And remember, there's much more to buying a new car than just the monthly payment.

Contact Elliot Raphaelson, a certified court mediator in Florida with experience in estate planning, at elliotraph@gmail.com.